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Seniors and the generation spending gap

Why are we doing so much to try to help seniors when they’re already the wealthiest generation in history?

At age 89, Larry South would have been forgiven if he had chosen to retire on a sunny beach in Florida. Instead, the former MPP from Kingston, Ont., recently embarked on a political battle to overhaul the municipal property tax system. South had been growing increasingly concerned that elderly homeowners on fixed incomes were struggling to cope with rising property taxes because of the soaring value of their homes, while at the same time he fretted that young workers, with their stagnant wages, were being shut out of the housing market. And so South proposed replacing property taxes with a tax equal to 4.5 per cent of a homeowner’s yearly household income. Doing so would make it easier for young workers to afford the cost of owning a home, while struggling seniors, he believed, would be the biggest beneficiaries.

But in his quest to change the tax system, he has come across an unlikely foe—his elderly friends. Like South, a former engineer who estimates he earns a retirement income that’s 30 to 40 per cent above the $86,000 household average in Kingston, many of his friends also pull in six-figure retirement incomes. Thanks to their high earnings, many would end up paying more in taxes under South’s plan than they do under the existing property tax system. Some, he says, resent the idea of paying more in tax than their younger, lower-income neighbours. “There’s not many that would have an income much less than $100,000, so their taxes will go up,” he says. “But they shouldn’t expect to be subsidized by the poor.”

South’s struggle to reform the property tax system, and the resistance he’s found among his affluent elderly friends, underscores what has been a remarkable shift in the nature of wealth in Canada. Seniors have long been considered society’s most vulnerable citizens, fragile pensioners on fixed incomes in need of a financial helping hand from both government and agile younger workers. That was true decades ago, but not anymore. Thanks to stock market booms, economic growth, a soaring real estate market and a major expansion in both private and government pension plans, today’s seniors are arguably the wealthiest generation in history. The changing fortunes of the elderly have been both swift and profound. In the 1970s, nearly 40 per cent of Canadian seniors lived in poverty. Today it’s five per cent, half the poverty rate of the working-age population and one-third the rate of poverty among children.

Seniors have seen their wealth quadruple since 1984, according to a Bank of Montreal study released last month, far outpacing the growth of wealth among younger Canadians. The stunning transformation of the balance sheets of the elderly is thanks to a combination of financial discipline, public policy and good timing. Many of today’s seniors were the babies born in the aftermath of the Great Depression who learned to abhor debt and save aggressively. (The average Canadian senior has a debt load equal to just five per cent of their total wealth, compared to a 99 per cent debt-to-wealth ratio for their Boomer children.) At the same time as they were socking away their hard-earned money, seniors got a major boost from the introduction of public benefits like Canada Pension Plan, Old Age Security and taxpayer-funded health care, which has helped push the poverty rate among elderly Canadians to one of the lowest in the Western world. Many benefited from decades of economic growth while being spared the brunt of the 2008 meltdown because they had already shifted their savings into low-risk investments when they retired, says Goshka Folda, senior managing director of research firm Investor Economics. During the depth of the recession in 2009, 86 per cent of retirees told Statistics Canada researchers that they weren’t financially stressed and were living better in retirement than they had expected.

Not everyone is benefiting from these changes, however. The fortunes of younger Canadians haven’t improved nearly as much as they have for the elderly. In the 1980s, the typical senior was four times wealthier than the average 20-something. Today’s seniors are now on average nine times richer than their Millennial grandchildren. In fact, many of the trends and policies that have worked in favour of seniors have come at the expense of younger generations. That’s led some to warn of a coming generational war if public focus and resources aren’t shifted away from seniors to younger workers who are struggling far more than their parents ever did.

“This seems to be the golden age of seniors,” says Roger Gibbins, who retired as the head of the Canada West Foundation think tank in 2012. “Not in the advertising sense like life begins at 55, but in the sense of economic circumstances that have come together that make it a pretty good time to be old in Canada.”

Forget fears about a retirement crisis in Canada—the one where cash-strapped seniors will outlive their savings and suck the government coffers dry. Seniors may eventually become the only thing that drives the economy. Canadians age 75 and older make up less than seven per cent of the population, but control more than a third of all financial assets in the country­­—roughly $1 trillion worth of stocks, bonds, mutual funds and cash, says Folda. That figure doesn’t even include the money locked inside their homes, which have more than quadrupled in value since the 1980s. Far from running out of money, many seniors actually continue to save well into their golden years. Malcolm Hamilton, one of Canada’s foremost experts on retirement, has estimated that senior couples save or give away an average of 18 per cent of their incomes—rising to 30 per cent for the wealthiest families. That certainly makes them generous, but does it mean they should continue to get seniors-only discounts or qualify for government benefits like CPP and OAS?

The dramatic change in the fortunes of seniors, from the impoverished pensioners of yesterday to today’s wealthy retirees, is among the greatest policy success stories in Canadian history. Yet there’s a dark side to the success, one that threatens to spark an ugly generational crisis, in large part because governments continue to focus so much of their resources on supporting the plight of economically fragile seniors at the expense of their far more fragile children and grandchildren. “We are mistaking physical frailty for financial frailty,” says Fred Vettese, chief actuary of Morneau Shepell and co-author of The Real Retirement. He estimates that fewer than 10 per cent of seniors actually fit the description of pensioners living on fixed incomes anymore.

Seniors’ incomes have jumped 40 per cent since 1984, says the Bank of Montreal, compared to 21 per cent for Baby Boomers and just three per cent for younger Canadians. Today, the average Canadian man aged 65-plus earns $45,817 a year compared to $42,160 for men aged 25 to 34. More than 40 per cent of Canadian millionaires are 65 and older. The median net worth of seniors has similarly jumped 70 per cent since 1999, but hardly risen at all for those younger than 35. Meanwhile, those under-35s have seen their debt rise almost as quickly as their grandparents’ wealth. Retirement savings accounts have shown the same troubling divergence. Since 1999, the proportion of seniors who have RSPs has grown 30 per cent, while it has fallen five per cent among younger Canadians.

Despite their affluence, seniors remain disproportionately the beneficiaries of government subsidies and tax breaks. German think tank Bertelsmann Foundation has called Canada among the “least intergenerationally just” countries in the world, with a troubling large gap between the poverty rates of seniors and children and a strong “elderly bias” among government programs and tax systems. It found we spend nearly four times as much on support for seniors as we do on children and have roughly $250,000 worth of government debt for every child, an indication that future generations will be paying for the excesses of previous ones.

From seniors-only tax breaks to free transit passes, Canadian governments now spend a collective $45,000 a year per senior in Canada compared to $12,000 for those younger than 45, says Paul Kershaw, a professor at the University of British Columbia who founded Generation Squeeze, an organization that advocates for generational equity. Most of the difference comes from big-ticket items like health care, along with CPP and OAS. But governments also spend an average of $613 per senior on tax breaks for housing, compared to $354 for similar housing tax breaks for younger Canadians, and offer seniors another $1,123 in age-related income tax credits. The federal government is increasing its spending on seniors at a rate of $12 billion a year, Kershaw says, while adding very little new spending for younger Canadians.

“We developed a sort of mythology of seniors as being very dependent or very vulnerable,” says Gibbins, 67. “I think to some degree that image of seniors living in unheated apartments eating cat food has been maintained almost as a way to protect a group of people who are actually doing very well these days.”

Many point to changes in the economy that are working to effectively shut out younger Canadians from the economic windfalls of their parents and grandparents. Increasingly, the retirement dreams of younger Canadians are resting on the foundation of an economy that is shifting toward low-wage service jobs—many of them for services catering to their affluent grandparents. “I go for my Starbucks every day and I can afford the price to keep that part of my lifestyle going,” says Gibbins. “But I need young people who are prepared to work at Starbucks for a pretty low income. It makes me feel a bit uncomfortable in this advantaged situation. I’m not sure it reflects my own hard work; it reflects the demography.”

Younger Canadians will inevitably be working longer than their parents and grandparents, given the age to qualify for CPP and OAS is rising from 65 to 67. Folda points out that more than 40 per cent of existing private sector defined pension plans, which have guaranteed a secure retirement for thousands of today’s retirees, are now largely closed off to new employees. Vettese thinks the longer working life won’t be an undue hardship for future generations since they’ll be living longer. But it will reverse a long-standing trend that has seen the median retirement age in Canada actually fall by two years since the 1970s. The idea of having to delay retirement is still likely to come as a surprise to young Canadians, a third of whom told researchers from the Bank of Montreal that they plan to retire before the age of 60.

At the same time, the end of mandatory retirement means more and more seniors are working long into their golden years. The employment rate for seniors has more than doubled since 1988, from 6.7 per cent to 13.2 per cent. That’s fine for those who need the extra income, but there is evidence that many seniors aren’t working because they need the money. While the share of seniors in the workforce has gone up, the share of those working full-time has actually gone down over the past 25 years, suggesting that many seniors aren’t staying in their jobs longer, but are instead turning to part-time jobs in retirement. Last year, the Municipal Retirees Organization Ontario studied public servants who continued working in retirement despite earning government pensions. More than half said their main motivation was to get out of the house. Just 16 per cent said they worked because they needed cash. Anger over the growing legions of older workers has flared up in the United Kingdom, where youth advocates have called on the government to scrap its discounted transit passes for seniors, arguing that the country now spends nearly $130 million (71 pounds) to help seniors to commute to work for free while unemployed young workers have to pay the full fare. It’s only a matter of time before similar generational conflicts over the workplace emerge in Canada as young people fight with their grandparents for the same jobs.

When it comes to the tensions between young and old, however, there’s no greater battlefield than the housing market.

Incredibly, the age gap is growing even when it comes to housing. Despite low interest rates that have allowed legions of young Canadians to qualify for large mortgages, it’s seniors who have experienced one of the biggest increases in home ownership of any age group. In 1981, just 66 per cent of those over the age of 70 owned their homes. Today it’s 72 per cent. Meanwhile, over the same period, the home ownership rate has actually gone down slightly among Canadians in their 30s and 40s. “Housing has kind of created this generational tipping point for an inequality in wealth that is playing out,” says Kershaw.

Like many his age, Martin Petter sees his children graduating from university into a vastly different world than he experienced in his youth. Armed with a Ph.D. from Oxford University in the 1970s, Petter had little trouble finding an academic job at McGill University with a salary that easily allowed him to afford to buy a house and interest-free government student loans that cost $15 a month to repay. Now 71 and retired as vice-president of North Island College in B.C., he worries about the fact that his daughters, both educated and ambitious women in their 30s, have amassed large student debts in order to find jobs. His youngest has recently gone back to university to train as a physiotherapist, and Petter helps her pay her student loans.

“The thing that particularly concerned me was hearing them talk about being able to one day buy a house and their almost fatalistic feeling that this really wasn’t something their generation could hope for,” he says. “I felt, why shouldn’t it be reasonable to hope for?” Every generation of young people faces challenges starting out in the world, he says, “but I think the hurdles I faced were much more surmountable and much more dependent on one’s individual ability than the current generation. So many of the things they face are beyond their ability to change.”

The fact that many young people are now digging themselves deeply into debt to buy a home is also engineering a massive transfer of wealth from young buyers to older sellers. Last year, University of Toronto geography professor Alan Walks mapped out a detailed geography of household wealth and debt in Canada. Walks found that cities with a high proportion of seniors also had higher levels of household debt. But when he looked closer, he found that it wasn’t the seniors who were deep in debt, but their younger neighbours, some of whom had debts worth more than 300 per cent of their incomes.

Far from trading in their suburban houses for quiet retirement communities, Walks found wealthy seniors have instead been competing with younger homebuyers for homes in the same sought-after cities. That has helped push home prices sky-high, particularly in mild-weather cities in B.C. “Wealthy seniors have been able to externalize much of the costs related to their stimulation of local housing demand onto the entire metro housing market,” he wrote, which has helped foster what he called “a new dynamic of generational inequality” that has transferred the financial risks to younger buyers while shifting the wealth to older ones. “Efforts on behalf of policy makers to maintain high real estate values in this context thus work to enlarge generational disparities,” he wrote, “as seniors are then able to cash out at elevated values while new families have to take on unsustainable debts to become homeowners.”

Eric Swanson knows that phenomenon all too well. Recently, he and his wife made an offer on a small house in Victoria, a popular destination for Canadian retirees who have been flocking to Vancouver Island from oil-rich Alberta. “There are a lot of retirees also looking for small houses on small lots, so it’s making it a bit more difficult,” says Swanson, 31-year-old executive director of Generation Squeeze. Growing up, Swanson’s parents, both working professionals, seemed to have little trouble buying large houses close to downtown. It’s a different world today. “There’s a big part of us that feels we’re assuming a lot more risk than we may be able to handle down the road compared to the experiences of our parents,” he says.

Others argue that the fact that many seniors have amassed sizable real estate wealth is less important than it seems since it means that plenty of seniors have become millionaires on paper, but with no way to cash out their housing wealth. Retirees who sell their suburban homes are often moving to the city, where they’re paying equally high prices for urban houses and condos with high maintenance fees, says Folda. “What we’ve seen really in the past decade is that the strategy of downsizing from grand houses to condominiums actually released very little liquidity to finance retirement,” she says.

But the fact that some seniors have trouble cashing in their real estate windfalls pales in comparison to the issues facing young workers trying to afford their first home, says Gibbins. “I’d much rather be in the situation of trying to squeeze some financial gain out of a property than be somebody just starting out with a young family and trying to buy a house in Vancouver.”

When it comes to housing, governments may be exacerbating the tensions between young and old. Several provinces offer property tax credits and subsidies that are only available to seniors. Earlier this year, Alberta launched a program that allows seniors to defer their property taxes until they sell their home or die—when the back taxes can then be taken out of their estate.

Such preferential treatment isn’t limited to property taxes. Politicians of all stripes compete to promise new programs and tax breaks for seniors, while programs that would benefit younger Canadians, such as tuition and daycare subsidies, are considered too expensive for cash-strapped governments. Even programs that have proven uncontroversial when introduced for seniors can spark a political battle when governments try to expand them to younger Canadians. The Harper Conservatives introduced pension income splitting for seniors back in 2007, and heard no one object. But income splitting became a political nightmare when the government tried to expand it to families with children. Just as the proposal was seen to be supporting rich couples at the expense of poor single moms, the Canadian Centre for Policy Alternatives estimates that income splitting for seniors has disproportionately benefited the wealthiest retirees—allowing them to qualify for an extra $250 million in Old Age Security payments next year.

It’s easy to blame seniors for stacking the deck in favour of their own generation. But in many ways, says Kershaw, it’s actually younger Canadians who are to blame for the lack of public support for their issues. Turnout among younger voters is notoriously low, so politicians naturally target their campaigns to the seniors who actually show up on election day. Many young Canadians also seem to support the idea of boosting spending on seniors—even at the expense of their own generation. Kershaw has polled Canadians, both young and old, asking them which age group should be the top priority for government. Not surprisingly, 70 per cent of seniors said politicians should focus on them. But he found that younger Canadians were just as likely to say governments should prioritize seniors as they were to say they should help their own generation. “Younger Canadians, like older Canadians, believe the stories about who is most vulnerable still in society,” says Kershaw. “These stories are increasingly outdated because they’re based on the big policy challenges of the past and a failure to recognize that the situation has really changed.”

However, institutions that have tried to shift spending away from older Canadians often face a fierce public outcry. The B.C. government sparked protests when it announced it was scrapping the seniors discount on its ferry service. Seniors complained bitterly earlier this summer when Mount Allison University in New Brunswick said it would start charging them to attend university alongside their tuition-paying grandchildren. Calgary Mayor Naheed Nenshi has said he’s opposed to a plan by the city to scrap a discount that allows low-income seniors to pay $15 a year for public transit even though younger low-income residents pay $44 a month. “I can still not understand why someone living on $1,500 a month should be treated different if they’re 55 or 65,” Calgary alderman Jim Stevenson told council during the vote.

Kershaw’s answer to the growing generational tensions is to try to turn Generation Squeeze into an organization for young Canadians that can rival the powerful seniors’ lobby group Carp (formerly the Canadian Association of Retired Persons). One idea the organization is taking directly from Carp is a membership card that would offer discounts on products and services, sort of a seniors discount for the under-45 set. Unlike Carp’s membership card, which offers deals on things like home insurance, fitness plans and travel discounts, a Generation Squeeze membership could include discounts on youth-friendly services like car-sharing programs and “mixer mortgages” that allow friends and roommates to co-own a house. By boosting the market clout of younger Canada, the organization hopes to force governments and corporations alike to start catering to their needs.

But for there to be any meaningful change, governments will likely need to rethink the perks they give to their elderly voters and instead tailor their programs to those who really need the help, regardless of age. Gibbins thinks wealthy seniors may need to start covering more of the cost of their own health care to free up government resources for struggling younger workers. Despite the inevitable political blowback, governments may also need to start subjecting sacred seniors’ benefits like pension income-splitting or CPP and OAS to a “means test”—a sliding scale based on income. Today, a couple can earn a combined retirement income of $140,000 and still qualify for full Old Age Security. They can earn as much $230,000 before those benefits are clawed back entirely. In a study last year, the Fraser Institute proposed that lowering the clawback threshold for OAS benefits to $102,000 for a couple (or $51,000 per person) would free up $730 million in federal cash every year.

The idea of also clawing back CPP for high-income retirees might seem inherently unfair given that those seniors paid into the system when they were working. But it wouldn’t be the first time affluent Canadians have paid more in taxes than they’ve received in benefits in order to support the less wealthy. “If we can just change that focus of vulnerability from the old to the young, I think we would really have accomplished something important,” says Gibbins.

The battle over how cash-strapped governments should divvy up their limited resources between young and old is only likely to heat up as the biggest wave of Baby Boomers enters retirement over the next decade. But it’s a battle worth waging—unless we want today’s seniors to be the last generation of Canadians living in retirement bliss.

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